On August 2, 2011, President Obama signed into law the Budget Control Act of 2011 (BCA), which addressed the near-term issue of increasing the debt limit of the US, but also set in motion a process for mandated reductions to government spending. While the debt ceiling debate captured headlines, implementing the spending reduction provisions of the BCA will have far-reaching impact on a wide range of private sector entities as a result of the mandated cuts.

What Does the BCA Require? The BCA mandates initial cuts of $917 billion in spending by capping congressional appropriations levels for the next ten years. If this or future Congresses do not alter the BCA during the next decade, these cuts will total $567 billion for non-defense programs and $350 billion for defense programs. In addition, the BCA establishes a process for mandating an additional $1.2 trillion in spending cuts.

Presidential Authority to Increase the Debt Limit. The BCA grants the President the authority to increase the debt limit in stages, subject to a Congressional disapproval process. In exchange for the caps on discretionary spending, the BCA authorizes the President to increase the debt ceiling by $900 billion initially, and ultimately by up to $2.1 trillion (minimum) or $2.4 trillion (maximum). The President used his authority under the BCA to request a $400 billion initial increase in the debt ceiling on August 2 when he signed the bill into law.

Can Congress Veto Further Debt Ceiling Increases? The BCA grants discretion to the President to increase the debt ceiling by an additional $500 billion in the first phase, but authorizes Congress to block such an increase via a vote of disapproval. Such a request is likely to made within the next six months. Under the disapproval process, both the House and the Senate have the opportunity within 50 calendar days of the President’s request to pass a resolution of disapproval of the debt ceiling increase. If the Congress passes such a resolution and the President vetoes it, a two-thirds super-majority of the House and the Senate would be required to override the President’s veto.

The President may seek additional increases of $1.2 to $1.5 trillion in the debt ceiling, subject to the same Congressional disapproval process. An increase of this order of magnitude is believed to be sufficient to allow the government to operate until early in 2013. The size of the actual debt limit increase that the President may request will depend upon how much additional deficit reduction beyond the initial $917 billion is achieved.

Creation of the the Super Committee -- How It Works. The second step of BCA's deficit reduction regime involves the establishment of a congressional super committee to develop legislation to achieve additional deficit reduction. BCA created a bicameral, bipartisan Joint Select Committee on Deficit Reduction ("Super Committee") whose twelve members are charged with recommending by November 23, 2011 at least $1.5 in additional deficit reduction over the period of Fiscal Years 2012 to 2021. Given the composition of the Super Committee, developing a consensus package that can be agreed upon by a majority of its members will likely prove both a political and practical challenge.

The Super Committee will be made up of six Democrats and six Republicans – with equal numbers from the House and Senate. All of the Committee members must be appointed by August 16. In order to present its recommendations to the full Congress, the Super Committee’s proposal must receive at least 7 of the 12 votes. Thus, to be adopted, any final product must attract at least a modest degree of bipartisan support.

Several appointments have been made the Super Committee ahead of the August 16th deadline:

  • Senate Majority Leader Harry Reid (D-NV) has appointed Senators Max Baucus (D-MT), Patty Murray (D-WA) and John Kerry (D-MA). Senator Murray will serve as Co-Chair of the Committee.
  • Senate Minority Leader Mitch McConnell (R-KY) has appointed Senators Jon Kyl (R-AZ), Pat Toomey (R-PA), and Rob Portman (R-OH).
  • House Speaker John Boehner (R-OH) has appointed Congressmen Jeb Hensarling (R-TX), Dave Camp (R-MI) and Fred Upton (R-MI).

These members have a significant concentration among House and Senate Leadership, and many have roles in the tax writing and appropriations process.

At this point, Democratic members of the Super Committee are expected to insist on revenue increases being part of the final package, with Republican members likely to demand that all of the additional deficit reduction come solely from spending cuts.

Expedited Procedure and Limited Procedural Objections. The Super Committee operates outside of the existing Congressional budget process, which expedites Congressional consideration of any agreement reached by a majority of the Super Committee. Should seven of the 12 members of the Super Committee propose a package of cuts to the Congress, both the House and Senate will consider such legislation on an accelerated timeframe. The BCA mandates that House and Senate Committees of jurisdiction (i.e., those Committees who have oversight over the agencies or programs receiving spending reductions), along with the House Ways & Means, Senate Finance, and House and Senate Appropriations Committees consider the Super Committee proposals without amendment, and that the full House and Senate proceed likewise. Accordingly, no amendments, and only a simple majority vote will be required in both the House and Senate.

Winter is Coming: The Hammer of the BCA

The most significant impact of the BCA is the hammer of mandatory reductions to defense and non-defense in the event that the Super Committee does not reach agreement on alternative spending reductions, or in the event Congress does not enact alternative cuts into law. These automatic cuts are designed to create incentive among the Super Committee members and within both the Democrat and Republican caucuses in Congress to develop alternative reductions in spending or agreed-upon revenue increases to reach the $1.2 trillion target.

If a bill does not become law by January 15, 2012 that reduces the deficit by an additional $1.5 trillion over the next ten years, the BCA directs the Office of Management and Budget (OMB) to identify and implement cuts to defense and non-defense programs sufficient to produce $1.2 trillion in savings over ten years. These reductions would either be the full savings amount (if Congress has not acted at all), or the difference between Congressionally-enacted cuts and the $1.2 trillion in mandatory savings under the BCA.

If no additional deficit reduction becomes law, these automatic cuts of $1.2 trillion over ten years would represent a cut of approximately 8.0 percent from projected spending levels. Social Security payments, Medicare premiums, copayments, and certain low income programs are exempt from these across-the-board cuts The cuts to Medicare can only come from provider payments and are capped at 2 percent of the annual cost of the Medicare program. Military pay is also likely to be exempted from any automatic cuts to defense programs. Obviously, the size of these exemptions means that there will have to be substantially larger cuts to remaining programs than 8.0 percent to achieve the required $1.2 trillion in savings.

The BCA Timeline

Below is a list of key dates under the Budget Control Act of 2011 (P.L. 112-25) for action by Congress relating to the Super Committee. You can download the PDF version of the Budget Control Act here.

  • By August 16, 2011 – Congressional leaders must appoint the 12 members of Super Committee.
  • By September 16, 2011 – The Super Committee must hold its first public meeting by this date.
  • September 30, 2011-December 31, 2011 – During this period, the House and Senate each must vote on a balanced budget amendment to the U.S. Constitution. This legislation will almost certainly fail to garner support of 2/3 of the Senate mandated for passage of amendments to the Constitution and will likely also fail in the House.
  • October 1, 2011 – Unless the appropriations process is completed by this date, Congress will be forced to enact a continuing resolution funding the Federal government’s operations in order to prevent a government shutdown. A major question still to be determined is whether such a continuing resolution will be of relatively brief duration to allow the appropriations process to be completed or whether the CR will become a de facto omnibus appropriations bill for Fiscal Year 2012 that substitutes for the normal appropriations process.
  • By October 14, 2011 – Congressional Committees may report deficit reduction recommendations to the Super Committee for its consideration. Please note that Committees are not required to provide any recommendations.
  • By November 23, 2011 – The Super Committee must produce detailed legislation that would achieve at least $1.5 in additional deficit reduction over the period of Fiscal Years 2012 to 2021.
  • By December 2, 2011 – The Super Committee's report, legislative language and CBO score must be transmitted to the Administration and Congress.
  • By December 9, 2011 – All Congressional Committees to whom the Super Committee’s legislation is referred must report the legislation to the full House and Senate with no amendment.
  • By December 23, 2011 – The House and Senate must vote on the Super Committee’s legislation which cannot be amended on the Floor of either Chamber. A simple majority vote will be required in both the House and Senate to pass this legislation; 60 votes in the Senate will not be required.
  • October 1, 2012 – If a bill does not become law by January 15, 2012 that reduces the deficit by an additional $1.5 trillion over the next ten years, Director of the Office of Management and Budget(OMB) must make cuts to defense and non-defense programs sufficient to produce $1.2 trillion in savings over ten years. If no additional deficit reduction becomes law, these automatic cuts of $1.2 trillion over ten years would represent a cut of approximately 8.0 percent from projected spending levels. Social Security payments, Medicare premiums, copayments, and certain low income programs are exempt from these across-the-board cuts The cuts to Medicare can only come from provider payments and are capped at 2 percent of the annual cost of the Medicare program. Military pay is also likely to be exempted from any automatic cuts to defense programs. The size of these exemptions means that there will have to be substantially larger cuts to remaining programs than 8.0 percent to achieve the required $1.2 trillion in savings.